Oil plummets following Japanese earthquake

A catastrophic earthquake, magnitude 8.9 on the Richter, scale hit Japan overnight leading to widespread devastation and the potential for a cataclysmic loss of life. The quake is the worst in almost 140 years and is sending shockwaves across the fragile Japanese and global economy. Oil and food prices are falling as the markets will go through their three stages of grief, demand destruction, assessment and then rebuilding.

Tsunami warnings across the Pacific are raising concern that the devastation may be far from over and worries about major aftershocks still remain. There are Tsunami warnings for over 50 counties including the U.S. West Coast. There are fears that some islands in the Pacific will just be washed over. The process the markets must go through will take time as we pray for those who have been impacted and families suffering loss of life.

Early market reactions are predictable. Oil prices are plunging as refiners in the world's number three oil consuming nation shut down in the aftermath of the quake. Bloomberg News reports, "Japan consumed 4.42 million barrels a day of oil in 2010, according to data from the International Energy Agency's Feb. 10 Monthly Oil Market Report. China used 9.39 million barrels and the U.S., 19.25 million, the agency said."

The yen rebounded sharply partly because it acts as a safe haven, but also because it is clear that Japan will continue to have as loose a monetary policy as possible to rebuild after the quake. Grain prices are plummeting as it is feared that near term demand from Japan and other countries in the region might be halted.

Reuter News reported, "A fire broke out at Tohoku Electric Power Co's Onagawa nuclear plant in northeastern Japan following Friday's major earthquake, Kyodo news agency said. Prior to the Kyodo report, the company had said it had not received information on whether there had been any problems at the nuclear power plant after the disaster. Separately, Fukushima Prefecture, the site of a Tokyo Electric Power nuclear power plant, said on Friday the plant's reactor cooling system was functioning, denying an earlier report that it was malfunctioning."

Yet there are some reports of people being told to evacuate. Reuters goes on to say, "Japanese media reported that the government had decided to declare a nuclear power emergency situation, which occurs if there is confirmation of radioactivity leaks from a nuclear power plant or a reactor cooling system breaks down. The Japanese government issued an official emergency at one of the country's nuclear plants Friday after a massive earthquake automatically shut down its reactors and caused problems with its cooling system, but said there are currently no reports of radiation leakage. ‘There are no reports of leakage from any nuclear power plants at the moment and no signs of any leakage,’ Chief Cabinet Secretary Yukio Edano said Friday.”

As a result of the state of emergency, the government will set up a special emergency task force to deal with the situation. At Tokyo Electric Power's Fukushima Daiichi plant, three reactors shut down automatically as designed after a magnitude 8.9 earthquake struck off the northeast of Japan on Friday afternoon. The quake also caused diesel-powered generators used to cool the reactors to stop operating, leaving the utility company with a shortage of coolant to bring the reactors to a safe temperature. Meanwhile, the three reactors atTohoku Electric Power Co.'s Onagawa plant in Miyagi, near the epicenter of the quake, also shut down automatically. A few hours later, the company said that it observed smoke coming from the building housing the No. 1 reactor at the plant. The company said it is still checking the safety of the reactor, but said there has been no reported leakage of radioactive substances.

But there sure are worries. More aftershocks are expected and more market action.

Keep the affected in your prayers.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

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